GNRC - Generac Holdings: Investors Did Not Like Q2 Earnings Results

2023-08-03 08:30:00 ET

Summary

• Generac Holdings Inc.'s Q2 earnings were disappointing, causing the stock to plummet.
• Weakness in the residential market is similar to Enphase Energy, Inc.'s experience, both impacted by higher cost of financing.
• Generac has the potential for growth in residential EV chargers and has the opportunity to position themselves for a green energy future.
• The valuation and risk profile appears to be reasonable. We have a neutral view on the company due to the high amount of uncertainty surrounding their medium-term outlook.
• For the time being, there appears to be better places for investor capital than Generac stock.

Thesis

Generac Holdings Inc.'s ( GNRC ) Q2 earnings results did not satisfy investors, and the stock is plummeting as a result. The investment case for Generac relies on long-term trends, and events such as heat waves or abnormally low temperatures can cause investors to have unrealistic expectations for the company over the short term. While the valuation and risk profile looks reasonable, for the time being we don't see a reason to get excited about the stock.

Q2 and Similarities to Enphase

Generac reported a dismal Q2 with sales down 23% and net income of $45 million ($0.70 per share) compared to $156 million ($2.21 per share) in Q2 of last year. These numbers aren't great, but there is an explanation for the weakness, and there were some bright spots in the report.

Taking a closer look at the numbers, we can see that some areas of their business saw growth. While their Residential revenue declined 44% to $499 million, their Commercial & Industrial revenue increased 24% to $384 million. This weakness in the residential market is similar to the kind that Enphase Energy, Inc. ( ENPH ) is experiencing. Both companies are hit by a higher cost of financing, which causes consumers to forgo purchases that they might otherwise make in a low interest rate environment. Generac sells products that are often financed, and their residential sales are likely suffering as a result. This headwind may dissipate over time if the Federal Reserve lowers interest rates.

Weather Events vs the Long-Term

Investors have a habit of bidding up Generac based on short-term weather events such as heat waves or abnormally cold weather. When the company fails to deliver in their earnings report, the stock sells off. This seems to be a little short-sighted, as any benefits Generac would receive from weather events wouldn't be realized for many quarters after the event took place.

The investment case for Generac revolves around an electrical grid that becomes increasingly decentralized. Consumers may want to rely on solar power and battery systems while also wanting to ensure that their home can receive power if the sun isn't shining and their batteries aren't charged. In areas with blackouts Generac's products provide the peace of mind that a consumer will still have power regardless of what the utility does.

A potential area for growth is their residential electric vehicle ("EV") chargers. Generac may be able to transition their business to helping consumers build a green energy ecosystem, which would help to future proof Generac's business while also taking advantage of energy trends.

Unfortunately for investors and consumers Generac has a glaring installer problem/lack of installers. Until this gets fixed, the company will have a continued headwind.

Generac has the opportunity to position themselves for a green energy future, and much of their weakness can be explained by the macroeconomic environment. That being said, it remains to be seen whether management can navigate this period effectively. We have a neutral opinion on the stock for now but can understand why investors may have a strong bullish or bearish take on the company.

Price Action

Generac's stock is getting killed after reporting earnings. Many investors certainly did not like what they saw, but long-term investors who are bullish on the company may decide to use this selloff as a buying opportunity.

Valuation

While not as cheap as it has been, Generac appears to be trading at a reasonable valuation. This is especially true after their massive post-earnings drop. Whether an investor decides to take a position in Generac will depend on whether or not they believe the company will be able to generate above-market growth over the coming decade. Investors buying here may want to consider selling out if the forward P/E returns to the 25 range if there isn't an accompanying improvement in the growth outlook.

Risks

A big risk to Generac is that their generators fall out of favor with consumers. The transition to "green energy" may cause consumers to prefer alternative solutions and governments to incentivize alternative solutions.

Another risk is that Generac may not be able to increase the number of installers in their network. This would cause an installation bottleneck and drive up installation prices for consumers.

Generac may be unable to transition their business towards a model that focuses more on renewable energy solutions. This would increase the risk that their business falls behind due to trends in technology and energy.

Finally, interest rates may stay high and consumers may be unable to afford Generac's products. This could cause growth to run below expectations for a period of years.

All in all we view the risk/reward as being reasonable. That being said, the potential upside from here is difficult to judge. There are likely better opportunities out there, but an investor who is more knowledgeable on the space may identify that Generac is a buy at these levels. For us it is challenging to get particularly excited about the company here.

Key Takeaway

Generac Holdings Inc. reported a dismal Q2 and the stock has sold off as a result. While the valuation and risks look reasonable here, we don't see a reason to get excited about the stock when there are much better opportunities out there (in our opinion). Investors who are more knowledgeable about Generac and the markets they serve may view this selloff as a buying opportunity, and it certainly may be. Only time will tell.

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